Savings Rate Forecast for 2025: What to Expect as Rates Head Lower

The Bank of England's Base Rate trajectory and the swaps market are expected to play significant roles in determining savings rates in 2025. As the markets expect the Base Rate to fall due to receding inflation, swap rates have been coming down throughout 2024. However, the Autumn Budget has slightly altered this trajectory, with swap rates increasing in the final quarter of the year. This change in outlook for the Base Rate is expected to underpin the savings market for a little longer, which should help maintain competitive market pricing for savings rates in 2025.



The demand for savings deposits is expected to remain robust in 2025, which will provide further support for competitive market pricing of savings accounts. This is due to several factors:

1. Banks repaying Covid loans: Many banks need to repay billions of pounds in loans to the Bank of England from the Covid period. This increased demand for savings deposits will help maintain competitive pricing in the market (Source: Derek Sprawling, Paragon Bank).
2. Increased savings rates: The savings rate environment following the 2022 mini-Budget has led to a significant increase in cash savings. This higher savings rate will continue to drive demand for savings accounts in 2025 (Source: Derek Sprawling, Paragon Bank).
3. Peak savings rates: Although savings rates are expected to fall in 2025, they are not anticipated to decline as rapidly as initially thought. This is due to a change in the outlook for the Bank of England Base Rate, which should underpin the market for a little longer (Source: Derek Sprawling, Paragon Bank).

Inflation and economic growth will also play a significant role in determining savings rates in 2025. As inflation increases, the real return from cash savings decreases. This is because the purchasing power of money is eroded by inflation. Therefore, as inflation rises, savings rates will need to increase at a faster pace to maintain the same real return. However, the bond market suggests that the Bank Rate will fall to around 4% by the end of 2025, which could indicate that savings rates may not keep up with inflation, leading to a decrease in real returns.

Economic growth can influence savings rates through various channels. For instance, a growing economy may lead to increased demand for loans, which can put upward pressure on interest rates. Conversely, a slowing economy may lead to decreased demand for loans, putting downward pressure on interest rates. Additionally, economic growth can affect the demand for savings products. During economic expansions, consumers and businesses may be more likely to save, increasing the demand for savings accounts and potentially driving up rates. However, during economic slowdowns, the demand for savings may decrease, leading to lower rates.

In conclusion, the Bank of England's Base Rate trajectory, the swaps market, inflation, and economic growth will all play crucial roles in determining savings rates in 2025. As inflation increases, savings rates will need to keep pace to maintain real returns. Economic growth can influence savings rates through changes in loan demand and savings product demand. Therefore, savers should monitor these economic indicators to make informed decisions about their savings strategies. Despite the expected decline in savings rates, the demand for savings deposits and the underpinning of the savings market by the Base Rate outlook should help maintain competitive market pricing for savings accounts in 2025.